2018 REAL ESTATE MARKET FORECAST

January 19, 2018

By Stephen Jenco, Ignatius Armenia and Marta Villa

OFFICE MARKET

With the state’s unemployment rate below 5.0 percent, employee recruitment and retention will remain top priorities for office occupiers in the coming year. Rather than remaining in outdated, inefficient workspaces, a growing chorus of companies will pursue relocations to upgraded, amenity-filled office buildings to aid in these efforts.

As a result, savvy landlords are upgrading their buildings and packing them with amenities to help make their product stand above the competition. Among these enticements is adding food trucks, coffee bars and high-end fitness centers to their properties. Look for other owners to offer perks like subsidized ride-sharing programs to and from downtown areas or train stations. Buildings completed or extensively renovated since 2010 boasted a 12.0 percent vacancy rate compared to the 24.2 percent state average.

The high-tech industry will remain an integral driver of growth for the New Jersey economy and the commercial real estate market in 2018. This sector accounted for one-quarter of signed leases during each of the past two consecutive years, which represented the largest share of demand witnessed in the state’s office market. Proximity to Manhattan and a skilled local workforce will encourage a variety of high-tech companies to continue expanding their operations here. Collaborative partnerships between educational institutions and the high-tech industry will also help foster continued expansion.

INDUSTRIAL MARKET

With year-end industrial vacancy reported at new lows— representing 9.5 million square feet of absorption—2017 marked one of New Jersey’s strongest years. The second highest year-end absorption total since the global financial crisis.

The extraordinary demand for logistics space accounted for absorption and fueled a rental rate growth of 14.0 percent outpacing the 13.1 percent logged in 2016.

As we head into 2018, the New Jersey industrial market will continue an accelerated rate of growth and nearly all market fundamentals are expected to break previous records. Most notably, more than 12.0 million square feet is anticipated in 2018, representing a 50.0 percent increase over the 8.0 million square feet delivered in 2014 and the largest volume of new space deliveries since 2001.

With demand outpacing supply at a rate of three to one, a third year of solid rental rate gains are expected and vacancy rates are projected to break below 3.0 percent by year-end 2018. The growing imbalance between supply and demand will create new opportunities for savvy developers to place capital and drive returns.

RETAIL MARKET

A 4.9 percent increase in in-store sales over last year and an 18.0 percent increase in internet sales represented strong performance across the retail sector for the holiday season. Despite that promising performance, projections suggest that nearly 9,000 U.S. stores will close in the coming year. A shift in mindset will drive retailers to shed underperforming or marginally performing locations and result in increased vacancies across key retail portfolios and asset classes.

Retailers will continue to leverage rising availabilities in lease renewal negotiations to seek shorter terms and discounted rates to remain in centers. In lieu of five- or 10-year renewals, tenants—mall tenants in particular—will request one and two-year renewal terms. Landlords will likely accept these terms to keep centers tenanted, meet co-tenancy requirements and attract new retailers which can be difficult as vacancy rates increase. In addition, landlords will continue plans to execute redevelopments or property enhancements to maintain competitive positioning.

Grocery, fast/casual restaurants and fitness will continue expansion and non-traditional tenants such as education, medical and entertainment will continue to lease space in shopping centers. Well-located retail properties and shopping centers will remain occupied or in high demand.

While new retail properties will drive New Jersey rents to all-time highs averaging $45.00 to $55.00 per square foot.

Joshua Burd, an award-winning reporter and editor, has been covering New Jersey commercial real estate for eight years. Many industry leaders view him as the go-to real estate reporter in the state, a role he is eager to continue as the editor of Real Estate NJ. He is a lifelong New Jersey resident who has spent a decade covering the great Garden State.